Finance Minister Michael Noonan has said he believes the country's main banks will slash their high variable rates if their customer bases come under "threat" from new competitors.

Senior bank executives told Mr Noonan last week that they had put in place a series of "options" for borrowers, which would allow them to reduce their monthly payments.

These include fixed rates that are lower than variable rates.

Mr Noonan has urged mortgage holders to contact their banks and switch provider "if the offer is not satisfactory".

But he is understood to have refused to request banks to slash their rates.

The minister is instead banking on the prospect of them doing so voluntarily as a result of increased competition.

"Competition is the best long-term way of reducing interest rates paid by Irish borrowers and ensuring that Irish banks offer a sustainable product range," Mr Noonan said in response to a parliamentary question by Mayo Fine Gael deputy Michelle Mulherin.

He continued: "Higher-than-warranted mortgage interest rates will encourage new entrants to the Irish market over the longer term."

Mr Noonan refused to be drawn on whether he would introduce in next month's Budget a bank levy on those institutions that refuse to cut standard variable rates.

He told Ms Mulherin: "The Deputy will be aware that it is not the practice of the Minister for Finance to comment in advance on items which may or may not be part of the Budget and Finance Bill."

It is understood that a fear of having renewed calls for lower variable rates rejected by the banks and concerns about political interference in banking have stopped the minister demanding more action to date.

Ms Mulherin said she believed there must be consequences for those banks which fail to provide new arrangements to borrowers.

"The situation should be closely monitored by the minister to ensure that hard-pressed borrowers are benefiting under new arrangements," she told the Irish Independent last night.

"Where banks don't make the mark, then they should be taken to task and penalised."